Upload
lisa-sanders
View
218
Download
0
Embed Size (px)
Citation preview
Review Dr. Thomas Burnham’sPresentation
Ted Mitchell
More on Marketing ROI
MKT 316 ClassMarch 23, 2015
Accounting, Finance, Marketing• How does accounting report profitability of an investment that generates
revenues over time?• Allocate the cost of the investment from time zero and try to match sunk costs
with revenues over time (depreciation)• How does finance treat an investment in capital (a revenue producing asset)?
Profit = (Present Value of cash flows) – Cost of Investment• Hold the cost of the investment at time zero then fold back the future cash
revenues and expenses with time value of money to determine the net present value of the the investment (net profit in today’s dollars
• How does Marketing treat an investment in operating capital?• Marketing profit Z, = ROMI x Investment, I• Invest in a marketing strategy, 4 P’s, and you make a commitment to this strategy
in time zero. All the future marketing expenses which you committed to regardless of when they occur are held to be sunk at time zero. All the future revenues which are generated by these expenses are minus the cost of those expenses are the profits from the investment. All can be pulled back as present values
ROI: Return on Investment
• ROI = (Return – Investment) / (Investment)
Spend $1,000.
Get $1,500 back.ROI?
50%
Spend $1,000,000.Get $1,500,000
back.ROI?
50%
Profit has a quadratic relationship to Investments
Gross Profits $1,00
0’s
Investment $ (or Effort)
1
$500
2
3
4
5
6
7
$1,000
$1,500
$2,000
$2,500
$0 $3,000
ROI: ($1,500 - $100) / $100 = 1,400% ROI: ($5,500 - $700) / $700
= 686% ROI: ($6,800 - $1,300) / $1,300 = 423%
ROI: ($4,000 - $2,700) / $2,700 = 48%
Average ROI is always declining
ROMI is a ratio of
• ROMI = Marketing Profit, Z/Investment, I• Profit is a function of Investment• ROMI = ƒ(I)/I• Where profit, ƒ(I) = aI – bI2
• Profit is a function of Investment size• ROMI = (aI – bI2)/I• ROMI is a function of Investment size• ROMI = a –bI
ROMI = (aI – bI2)/I ROMI= a –bI
Investment $
ROMI
Optimal size, I
ROMI = a–bI
20%
How ROI is Really Used
• Hurdle Rates• Allocation of Budget
• $50K to spend• Justifying Debt for Investment
• Borrow up to $50K at 8% interest
Investment
ROI Profit
#1 $10,000 75% $7,500
#2 $10,000 50% $5,000
#3 $2,000 40% $800
#4 $8,000 30% $2,400
#5 $20,000 25% $5,000
#6 $10,000 20% $2,000
#7 $30,000 10% $3,000
#8 $10,000 5% $500
The mistakes of a hurdle rate
Investment $
ROMI
Optimal size, I
Spend down to the hurdle rate
Low Hurdle rate
The mistakes of a hurdle rate
Investment $
ROMI
Optimal size, I
Lower the level of investment to
achieve the desired ROI
High hurdle rate
How much should we focus on ROI?
• NOT MUCH• We aren’t trying to maximize it, but rather to maximize profits
But…• We do want to measure returns or results of investments• And we want to estimate expected profits
• We want to make sure that ROI will be above zero• That the investment will create positive returns
• We can use ROI to compare investments• As capital is usually limited
• Thinking about ROI prods us to understand numerically how investments generate returns
Buyer Readiness InvestmentsAKLPCP
+ 64 + 32 + 16 + 8 + 4 + 2
Indirect Response: Pre-Purchase Goals
+ 64+ 2
• Spend on Newspaper or Radio?
• Spend $500 or $5,000?
BizCafe: Investments in Advertising
• Do ad effects (on Awareness) decline with increased spending?• Does anything other
than Advertising affect Awareness?
$0
Response
Investment $
0 Radio
5 Radio
10 Radio
Period 2 (baseline) 26.0% 26.0% 26.0%
Period 3 31.1% 36.5% 41.9%
Change 5.1% 10.5% 15.9%
Less baseline 5.4% 10.8%
Customer Responses to Investments (Cost of the Marketing Effort)
The Response Curve Shape Matters
$0
Response
Investment $
Customer Responses to Investments (Cost of the Marketing Effort)
The Response Curve Shape Matters
$0
Response
Investment $
Direct Relationship
Customer Responses to Investments (Cost of the Marketing Effort)
The Response Curve Shape Matters
$0
Response
Investment $
Direct Relationship
Linear Relationship
Customer Responses to Investments (Cost of the Marketing Effort)
The Response Curve Shape Matters
$0
Response
Investment $
Direct Relationship
Linear Relationship
Exponential relationship
Customer Responses to Investments (Cost of the Marketing Effort)
The Response Curve Shape Matters
$0
Response
Investment $
• Questions?